Here's Why Caterpillar Is a Buy Before Earnings

The artificial intelligence (AI) trade can be a gift and a curse. Just look at Caterpillar (NYSE: CAT). Previously a non-tech darling of AI enthusiasts, this industrial stock is slumping ahead of its second-quarter earnings report, due on Tuesday, Aug. 4.

With investors perhaps temporarily cooling on the AI trade, Caterpillar stock is off 16.4% over the past month and, as of July 28, was laboring 22.3% below its 52-week high. That's a bear market. To be sure, those are ominous data points, and they imply no margin for error on estimates calling for earnings per share of $6.25 on sales of $19.31 billion.

Caterpillar's pullback may be an opportunity to buy the stock ahead of earnings. Image source: Getty Images.

Combine those factors, and market participants are understandably skittish ahead of the machinery giant's earnings report. On the other hand, risk-tolerant investors with long-term perspectives may want to consider capitalizing on Caterpillar's recent dip and evaluate the stock ahead of the Aug. 4 earnings update. Here's why.

Data centers still matter

The days of Caterpillar being viewed solely as a cyclical construction and mining equipment manufacturer are gone. Global spending on artificial intelligence, including data centers, has seen to that. Caterpillar's wide moat in construction heavy machinery has put it in a prime position for the data center build-out.

It's a double-edged sword. Now that it's tethered to the AI trade, Caterpillar, as shown in recent weeks, is treated like an AI stock, and when those names are out of favor, derivative plays suffer. But hyperscalers, including Amazon and Meta Platforms, remain undaunted. Hyperscalers are planning to spend as much as $700 billion on data centers this year.

Yes, that's priced into Caterpillar stock, and with the shares appearing expensive, the company has no latitude to provide anything but bullish data center commentary. The upcoming earnings report is an opportunity to allay investor concerns, with the energy and power segment providing opportunity for Caterpillar to regain its bullish ways post-earnings.

Once an afterthought in the broader Caterpillar investment thesis, energy and power are now a key growth driver for the company. The business grew 30% last year, and some experts see no evidence of a slowdown, particularly as estimates indicate data centers could consume as much as 9.1% of U.S. power by 2030.

More power

With Caterpillar, near-termism is winning the day. For the moment, many large-cap stocks with AI ties feel as though they're wearing scarlet letters, heightening pre-earnings risk for Caterpillar.

Cooler heads will prevail, potentially soon, particularly if the energy and power segment continues thriving. It's a vital cog in the long-term Caterpillar thesis, which is the perspective investors should adopt. Not only does Caterpillar provide backup generators, but it's expanding its field of data center power opportunities by delivering primary power, potentially setting the stage for recurring revenue over the long term.

There may be bumps heading into earnings, but Caterpillar isn't a lottery ticket. It's a matter of when, not if, the market reconciles this is one of the more compelling large-cap, non-tech AI plays for long-term investors.

Todd Shriber has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon, Caterpillar, and Meta Platforms. The Motley Fool has a disclosure policy.